Are You Aware of Your Options for Tax-Free Retirement Plan Distributions?

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Planning for retirement presents various challenges. The most obvious challenge for many is figuring out how to make your money last. But another significant challenge that you should be mindful of is understanding how to take retirement plan distributions in a way that will most effectively minimize income tax. After all, the less income tax you pay, the more money is left for you to enjoy in retirement. So we want to review some of your options for tax-free retirement distributions.


Qualified Distributions from Roth Accounts Are Tax Free!

The IRS treats a Roth IRA withdrawal made more than five years after the first tax year in which you made a contribution (including earnings) as a “qualified distribution.”[i]  Roth IRAs are a great, tax-efficient way to save for your retirement.  Although you do not get a deduction for contributions to a Roth account, withdrawals from the Roth IRA (including earnings) are usually tax-free.  In addition, you do not have to take required minimum distributions (RMDs) from a Roth IRA, which is a huge benefit.  And the original account owner is not required to ever take withdrawals during their lifetime.

Simply put, with a Roth IRA, you pay taxes on money going into our account, but all qualified future withdrawals are tax-free.  And since every dollar you stash in a Roth IRA is your money, you can withdraw your contributions at any time, without tax and without penalty.  Moreover, if you expect your tax rate to be higher during retirement than it currently is, then a Roth IRA may make the most sense for you.  It will allow you to minimize the tax bite in retirement and also enable you to leave assets to your heirs tax-free.


Converting to a Roth IRA is generally easy, especially since the federal government removed the income limit on conversions.  Now, you can convert to a Roth IRA no matter the amount of your income.  But it’s important to keep in mind that, though everyone’s tax situation is different, taxes typically increase as people get older and earn more money.  So it’s a good idea to consider converting to a Roth IRA when you are younger and/or in a lower tax bracket.  (Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA.  The converted amount is generally subject to income taxation.)

We love the Roth IRA and often consider this strategy.

Withdrawals of Basis in Workplace Retirement Accounts Are Tax Free!

Non-deductible contributions to an IRA or employer-sponsored retirement plan are not taxable when they are distributed.  The reason these contributions are tax-free is because the withdrawal is considered return of principal, which is the account owner’s original cost of investment.

Whether or not you’re eligible for withdrawals from your Workplace Retirement Account is dependent on the plan guidelines.  If you’re wondering what options you have, ask your employer who to contact and give them a call.  You can also call our office and we would be happy to help you take all necessary steps.

There are many avenues worth exploring when it comes to saving on retirement taxes.  We are here to help you plan for retirement in every way possible.  Please contact us if you have any questions.


[i] This means it is not taxable or subject to a penalty as long as you are age 59 1/2 and satisfy one of these qualifying conditions: – A withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase. – A withdrawal to pay for qualified education expenses. -Disability or death. – A withdrawal to pay for unreimbursed medical expenses or health insurance if you’re unemployed. – A distribution is made in substantially equal periodic payments. Limitations and restrictions may apply. Withdrawals prior to age 59 or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.  We suggest that you discuss your specific tax issues with a qualified tax advisor.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advisory services offered through CWM, LLC a Registered Investment Advisor. LPL Financial is under separate ownership from any other named entity.

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